Investors, however, are more focused on the recent past: Lear (LEA) gets about 40% of its sales from Europe, which has been on the edge of disaster for several years; the company went bankrupt in 2009; and supplying gear to auto makers has been mostly a bad business of late. The shares reflect these worries. They've fallen 27%, to $40.40, from a post-bankruptcy high of close to $56 in early 2011, and now trade at distressed multiples to earnings and enterprise value to Ebitda (earnings before interest, taxes, depreciation, and amortization).

Buyers need to refresh their view. North American light-vehicle production is rebounding smartly. Forecasts by J.D. Powers & Associates put production at more than 15 million units this year, up 17% from last year. After 2008's global credit crisis, the number had fallen to about nine million from 17 million to 18 million.

Car electronics, including the Smart Junction Box (above), will drive Lear's future growth. Recyclable materials cut the weight of Lear's Evolution seat (below) by as much as 25 pounds.
Courtesy of Lear

More and more of these vehicles contain new electronic features that control power efficiency and improve handling while offering state-of-the-art audio, security and GPS systems, with clear benefits accruing to Lear. It is the exclusive supplier, for instance, of battery-charging systems for the Chevrolet Volt, GM's electric vehicle, including a wall-charging station, a travel charger, an onboard charger, wiring for low-voltage and high-voltage needs, and a disconnect button.

Revenue from Lear's electrical division reached a record $877 million in the third quarter, and margins increased to 7.5% from 5.4%. Electric sales are 43% higher than two years ago, and profits have more than doubled. Electronics is seen as the big driver of future revenue growth at Lear. "We will grow faster than the market and the space," says Matt Simoncini, president and chief executive. "We're winning business from everybody."

Lear also is the world's No. 2 maker of seating systems for vehicles, behind
Johnson ControlsJCI -0.8670520231213873%Johnson Controls Inc.U.S.: NYSEUSD51.45
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P/E Ratio
27.352472089314194Market Cap
34113559932.3944
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2.021379980563654% Rev. per Employee
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(JCI). Although this is a slower-growth market, Lear has used its electronic expertise here as well. Drivers and passengers now have heating and cooling options and even the possibility of a massage. Lear is also pushing ahead with light-weight fabrics and environmentally-conscious materials. As auto sales rise, so do the sales of seats.

Beyond sturdy fundamentals, Lear boasts a strong cash position that has allowed it to give more back to shareholders in dividends and share repurchases. It boosted its payout by 12% in the first quarter, giving the shares a yield of 1.4% and a payout ratio of 11%. That means it's got lots of room to hike the dividend. It also bought back 4.2 million shares through the third quarter for $173 million, and about 10 million shares for $452 million since it started the program in 2010. Close to $250 million remains in its share-repurchase program, which expires in February 2014.

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Moreover, the strong balance sheet will permit Lear to make more of the niche acquisitions it has used to fortify its leading role in seats and electronics. In the second quarter, it purchased Guilford Mills, a fabric maker.

At less than eight times forward earnings of more than $5 a share and about three times enterprise value to Ebitda, Lear trades at a steep discount to the 10-to-15 times earnings and 4.5-to-6.5 times EV/Ebitda multiples that the auto-supplier group has fetched historically.

While auto-supply stocks generally are out of favor, Lear arguably is the least popular. Considering its $640 million in net cash, or about $6.50 a share, the stock appears even cheaper. There's also the hidden asset of Lear's nearly 23% stake in International Automotive Components Group, which makes a variety of items, including doors and trim, as well as instrument panels and consoles. IACG, with about $4.7 billion in annual sales, is owned by financier Wilbur Ross and eventually is expected to be taken public, a potential windfall for Lear.

"You're looking at a stock that could more than double" in a few years, says Ragen Stienke, a portfolio manager at Westwood Capital in Dallas, as revenue growth and margin expansion lead to a better multiple.

THAT WOULD BE EASIER done if the Continent's woes didn't weigh on the shares, despite evidence that Lear is managing the difficulties well: European vehicle production declined 7% in the third quarter, and Lear's sales fell 10%; yet its operations in the region continue to be profitable. CEO Simoncini points out that European vehicle production is already 30% off its peak, and so a major pullback from current levels isn't expected.

The Bottom Line

Lear shares could more than double within a few years, as cars utilize more and more electronic controls and gadgets. The stock is cheap.

Offsetting the weakness in Europe have been strong U.S. sales. In the third quarter, overall sales rose 2% from year-ago levels, tops among suppliers. Earnings from continuing operations came in at $1.29 a share, well above the $1.21 Wall Street forecast. Overall, Lear is expected to earn $5.37 a share this year on revenue of $14.3 billion.

Many investors still harbor doubts about the Southfield, Mich.-based company, following its 2009 filing for bankruptcy protection caused by an acquisition spree that saddled it with debt. Yet Lear emerged within months with a clean balance sheet and improved cost structure, after eliminating $3 billion in debt and divesting non-core assets.

Lear has come a long way from those dark days. Investors should sit up and take notice.